AGL to float retail assets

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The Australian Gas Light Company has joined a growing list of
companies cashing in on the investor fascination with
infrastructure, yesterday revealing plans to split its
infrastructure assets from its retail and merchant energy
business.

AGL also announced a debt-funded acquisition of Southern Hydro
from New Zealand's Meridian Energy for $1.43 billion.

It outbid Babcock & Brown and Origin Energy for Southern
Hydro, which owns 11 hydro power stations in NSW and Victoria, as
well as Australia's largest wind farm, at Wattle Point in South
Australia.

The price is believed to be substantially higher than the other
parties were offering. Origin's bid is understood to have been
under $1 billion.

Shares in AGL surged 64c, or more than 4 per cent, to $15.14
yesterday on news of the demerger and the Southern Hydro
acquisition.

The demerger comes as Hong Kong's Cheung Kong Infrastructure and
Singapore Power are about to raise more than $3 billion through the
listing of their Australian power assets on the Australian Stock
Exchange.

Last month, West Australian utility company Alinta successfully
floated its energy infrastructure assets on the ASX.

AGL's decision to separate its retail and merchant business from
its infrastructure assets was based on a belief the move would have
greater long-term value for shareholders, chairman Mark Johnson
said yesterday.

The energy business will keep the AGL retail brand, focus on
earnings growth and pay a fully franked dividend. Assets will
include AGL's gas and electricity business and Southern Hydro,
which has generating capacity of 736 megawatts.

The infrastructure business, meanwhile, will focus on cash-flow
growth and include the NSW gas network, Southern Hydro's Wattle
Point wind farm and a 30 per cent stake in Australian Pipeline
Trust.

Mr Johnson said the $4.5 billion Papua New Guinea to eastern
Australia gas pipeline provided a key opportunity for the
infrastructure business.

AGL has a major stake in the PNG gas project as a large buyer of
gas, a 50 per cent shareholder in the consortium that will build
the Australian leg of the project, and a pending 10 per cent
stakeholder in the upstream gas.

The company had "a high degree of confidence" that the project
would go ahead but "would have to amend our strategies" if it did
not do so, Mr Johnson said.

AGL managing director Greg Martin said the purchase of Southern
Hydro would give both businesses the critical mass needed to
operate on a stand-alone basis. "Now is the right time to proceed
with the demerger of AGL," he said.

"Southern Hydro gives the energy business substantial fast-start
power generation capacity in its core retail electricity markets
and a number of additional growth opportunities."

Merrill Lynch infrastructure and utilities analyst Matt Spence
said AGL had paid a high price for Southern Hydro but this was
outweighed by the benefits from the demerger. The broker has a
"neutral" recommendation on the stock.

"The price they have paid for Southern Hydro by any measure is
expensive," he said.

Mr Spence said AGL was "mirroring what Alinta did" in choosing
to demerge. "There is a value in demerging and having a growth
vehicle, which [for AGL] are the generation and retail assets," he
said.

Mr Johnson will become chairman of the energy business and his
counterpart on the infrastructure company will be AGL director
Graham Reaney. New chief executives for the two companies are yet
to be appointed.

Mr Martin will stand down as CEO - a position he has held for
the past five years - after the new bosses are appointed.

The Southern Hydro purchase will be funded through debt and, as
a result, AGL has cancelled the remaining $140 million of its
on-market share buyback program.

AGL expects the acquisition to reduce earnings by 2c per share
for the seven months to June 30 next year, and by about 2c to 3c in
2006-07.

Goldman Sachs JBWere said in note to clients that the demerger
was likely to more than offset negative aspects of the Southern
Hydro acquisition. The broker is an adviser to AGL.

The Southern Hydro acquisition is expected to be completed this
month, while listings for the two companies are due in April,
provided shareholders give their approval via a vote in March.